The Continuing Care Retirement Community: Financial Models

By R. Gerard Hyland

In
the
“NaCCRA CCRC Financial Soundness Committee Interim Report,”
Chair Walton T. Boyer, Jr. identified as a key consideration
Financial Models.
Continuing Care Retirement Community (CCRC) “entry fees” (also
referred to as “entrance fees,” “life-care fees,” “founder fees,”
and so on) are at the heart of CCRC stability.These fees are unique to CCRCs in their magnitude, in the
lack of agreement on how they are deter­mined, and how they can
appropriately be used.

At the heart of the problem with entry fees is that diverse
vested interests have different perspectives on entry fees as
described below:

Prospective
residents and residents
mostly view entry fees as an invest­ment in their remaining lifetime
housing and care.
Prospective residents sell their homes and invest a substantial
portion of their life savings in the entry fees.

Actuaries
view entry fees, in part, as a means to forward pay for the high
cost of end-of-life care in assisted living, skilled nursing, or
memory care.[1],[2]

Internal Revenue Service (IRS)
agrees with the actuarial view and allows resi­dents to deduct a
substantial portion of entry fees as a health care deduction on
income tax returns.[3]

Internal Revenue Service
also views entry fees as an interest-free loan by resi­dents to
CCRCs.The IRS would
normally require residents to pay an income tax on imputed interest
earnings on the loan except for an exemption.A few years ago, residents joined the American Association of
Housing and Services for the Aging (now LeadingAge) in a letter
writing campaign to the U.S. Congress to obtain the exemption.[4],[5]

Accountants
substantially disagree with actuaries. The accountant's
stan­dards for computing future cost of health care are less
stringent than actuar­ial standards.[6]

Accountants,furthermore, prescribe the standard that once an entrance fee is
paid, the CCRC does not owe the resident anything. Any
refundable portion of a resi­dent's entry fee is from the entry fee
payment of the prospec­tive resident who takes the vacated
apartment.[7],[8]

Investment Bankers
look at the cash from entry fees as providing assur­ance for their
bond investors.“An
entrance-fee community with bond cove­nants that require minimum
liquidity and capital-structure ratios, for example, will focus on
the days cash on hand ratio and the debt-service coverage ratio….”[9]The more funds residents contribute, the greater the
liquidity and capital structure ratios are likely to be, and the
greater the assurance provided to the bond investors.

Sponsor/Owner of a not-for-profit CCRC usually has little or none of its funds
in an operating CCRC.
The de facto “risk
capital” for long-term financing is from the unsecured entry fees.The other major source of financing is secured debt provided
by the bond holders.
According to David Reis, CEO, Senior Care Development, LLC, in an
interview after placing a stalking horse bid on the bankrupt $272
million Clare at Water Tower in Chicago’s Gold Coast, “The
model of a nonprofit getting 100% financing is going the way of the
dodo bird. That’s history. Because no one else in this business gets
to put no cash in the game, and doesn’t have to have any experience
to go out there and operate. Moving forward, a lot of people who buy
tax-exempt bonds, who would buy these—they’re gonna find that
they’re not gonna want to buy these types of bonds from nonprofit,
inexperienced sponsors.”[10]

NaCCRA Web Site

Federal bankruptcy courts
look at the cash from entry fees as funds to be used to repay
secured debt—the bond holders. “…Residents are at a disad­van­tage
because any claim they have on a CCRC that is forced into
bank­ruptcy is subordinate to the claims of secured creditors, such
as tax-exempt bondholders and mortgage lenders.”[11]

For further information, please refer to the endnotes below.

There is a need to achieve consistency of understanding by
all parties on a financial model for CCRCs that protects entry fees
for the intended purpose of funding residents’ end-of-life care, and
the return of any refundable portion for which residents may have
contracted. Since CCRCs are licensed at state levels, these
objectives will also have to be met at state levels.

We would like to hear from you on what
you think about the nature of entry fees. Write to Walt Boyer
at
walton.boyer@charter.net.

Mr. Hyland serves on the ad hoc CCRC Financial
Soundness Committee and is a resident at Mary’ Woods, a continuing
care retirement community in
Lake Oswego, Oregon.

[5] “… [A]bout three to five years ago the residents
joined AAHSA (now LeadingAge) in a letter campaign to
Congress to get the tax repealed and were successful.”
(Email from Charles Paulk to R. Gerard Hyland et al,
entitled, “RE: NaCCRA CCRC Financial Soundness Committee,
November 15, 2012.

Understanding, Not Advocacy

The aim is to let residents, and others who are interested,
learn. The hope is to try to present all points of view and
all alternative understandings so that residents can think for themselves
and make up their own minds according to their own
personal values.

As such we do not advocate policies but instead seek to
illuminate all sides of issues and all alternatives so that informed
people can make better choices.